Equity index rally extends but beware the gap

Then comes the doozy: Friday's jobs data. Nonfarm payrolls are expected to increase 175,000, which is not enough to really get this economy on the roll. The recent gains in jobs so far this year has struggled to keep up with the number of new workers entering the jobs market, let alone been enough to make a dent in the nation's staggering unemployment rate.

Also out on Friday is the Institute for Supply Management's nonmanufacturing index for May.

The Dow Jones Industrial Average ($DJI) ended the day with a gain of 128.21 points, or 1.03%, and closed at 12,569.79 on Tuesday. The Dow almost managed to finish with all of its index components in the black, but McDonalds (MCD) couldn't recover enough of its losses and finished lower by a mere 0.1%. The top performers in the index were Pfizer (PFE) (+2.48%), Cisco Systems (CSCO) (+2.07%), Alcoa (AA) (+2.00%), and United Technologies (UTX) (+1.67%).

The Nasdaq Composite ($COMPX) ended the session higher by 38.44 points, or 1.37%, on Tuesday and it closed at 2,835.30. The strongest performers in the Nasdaq-100 were Activision Blizzard (ATVI) (+4.72%), KLA-Tencor (KLAC) (+3.56%), Yahoo (YHOO) (+3.31%) and Sandisk (SNDK) (+3.21%). The weakest were Research in Motion (RIMM) (-1.72%), Broadcom (BRCM) (-1.48%), and Netapp (NTAP) (-1.01%).

A momentum reversal off highs around midnight in the index futures shifted the course of the market once again heading into Wednesday morning. The sharp recovery rally on Tuesday afternoon was followed by a series of slightly higher highs which shifted the overall pace of the rally and trapped new bulls with each higher high. This often triggers a strong reversal pattern, which took place into the early-morning hours on Wednesday and leaves the market weak once again as we head into the new trading day. The overall price action suggests that the 30-minute time frame has a higher chance of seeing a trading range form at this point since the momentum of the selling is now comparable to the overall rally from Tuesday evening. Even a continuation of the selling will typically lead with a period of congestion on a 15-30 minute chart before it can establish another strong intraday trend.

Unless otherwise stated, the index action described in this article relates to the E-mini futures contracts for the respective indices. Actual index action may differ slightly in terms of pattern formation, although the market bias will remain the same.

Toni Hansen is president and co-founder of the Bastiat Group Inc., DBA Trading From Main Street. Toni is one of the most respected technical analysts and traders in the industry. She has been trading and educating new traders, money managers, professional market analysts and traders throughout the boom and bust of the last decade. She has worked in conjunction with some of the world's top financial exchanges. Learn more about Toni Hansen and the educational services she provides through her website at http://www.tonihansen.com.

About the Author

Toni Hansen is president and co-founder of the Bastiat Group, Inc., DBA Trading From Main Street. Toni is one of the most respected technical analysts and traders in the industry. She has been trading and educating new traders, money managers, professional market analysts and traders throughout the boom and bust of the last decade. She has worked in conjunction with some of the world's top financial exchanges. Learn more about Toni Hansen and the educational services she provides through her website at http://www.tonihansen.com.